The inevitable fall in house prices will cost us dear

Graham_Devon

David Blacnhflower...

Started quoting at the bit I wanted to highlight, but there is more in the article.

He suggests a rise in interest rates will inevitably cause and immediate and deep house price crash.

To put this in context, according to the Halifax house price index, average prices rose by an average of 16 per cent a year between January 1995 and January 2005. Between January 2005 and August 2007, they grew by a further 21.8 per cent, which is likely to have narrowed wealth inequality even further. But then prices started to tumble as the Great Recession took hold. By the end of 2012, average house prices were around 20 per cent below their peak.

But the downward trend in the UK has stopped: house prices in 2013 have started to rise again. Between January and July 2013 they rose 4.2 per cent.

This does not look sustainable in the long run, given that the main determinants of house prices are wages, which aren’t growing, and interest rates, which are at historic lows and eventually must rise. A rise in rates any time soon, as proposed irresponsibly by Ros Altmann and Andrew Sentance, would inevitably cause an immediate and deep house price crash.

Earnings of full-time men rose by an average of 6.1 per cent between January 1995 and January 2005, well below the increase in house prices. The chart shows that the house price-to-earnings ratio rose to 5.8 in April 2007 from 4.8 only four years earlier. By October 2012, the ratio had fallen to 4.39 but has risen since then to 4.62.

What goes up must come down again, given that equilibrium of around 3.65 or so looks sustainable in the long run. Bank managers historically don’t grant mortgages of more than four times earnings. This suggests house prices are currently as much as 25 per cent overvalued. When house prices fall, they usually overshoot, suggesting falls may be even greater when rates eventually rise.

Slasher Osborne’s irresponsible new Help to Raise House Prices Scheme seems to be driving these increases. Homeowners have started spending as they see the value of their homes rise. So the solution to a housing boom and bust is to start another boom that will inevitably bust.

It is hard to find a single economist who thinks it is a sensible idea – it is cynically designed to buy votes. Based on the Government’s historic defeat over Syria, it is likely to need every vote it can get in 2015. The inevitable fall in house prices that is coming will cost the country dear, as Mr Osborne has provided a £100bn backstop. Here we go again.

http://www.independent.co.uk/voices/comment/house-prices-are-booming-again-but-the-bust-thats-bound-to-follow-will-cost-us-dear-8793316.html

ILW

Chances are that that they will not raise IRs until inflation is massive. Problem solved.

OffGridLiving

How many times does it have to be said that London is not the UK?

In the majority of the UK you have to have a recovery before you have a boom.

mystic_trev

OffGridLiving wrote: »

How many times does it have to be said that London is not the UK?

In the majority of the UK you have to have a recovery before you have a boom.

I'm not sure that's right.I think the second part of Help to Buy will create that boom next year.

HAMISH_MCTAVISH

mystic_trev wrote: »

I'm not sure that's right.I think the second part of Help to Buy will create that boom next year.

In large parts of the UK, prices remain 10% to 25% below peak even in nominal terms, and in the majority of the UK 5% to 10% below peak, and the ongoing spectre of negative equity still looms large for around 500-800K people.

Not to mention several million more who are effectively still stuck and unable to remortgage or move due to insufficient equity.

As it is absolutely crystal clear to all but the most dimwitted of politically motivated trolls, we didn't have a speculative housing bubble in 2007, just a genuine supply/demand imbalance.

Therefore it is completely impossible for us to be in a speculative housing bubble now, or even if prices recovered to 2007 levels, given that the supply/demand balance has worsened over the last 6 years.

If a boom now comes along and assists the recovery, then good, as the fundamentals suggest that UK house prices should be much higher than they are today, and only a wholly artificial mortgage famine has been keeping them repressed.

But for the recovery to even be considered complete, we'd need to see prices recover to the previous real terms peak throughout the UK, so 30% or so higher in nominal terms than today.

Once that has happened, then by all means let the debate begin about what would constitute 'bubble territory' for UK house prices.

gazzabboi

Graham_Devon wrote: »

David Blacnhflower...

Started quoting at the bit I wanted to highlight, but there is more in the article.

He suggests a rise in interest rates will inevitably cause and immediate and deep house price crash.


http://www.independent.co.uk/voices/comment/house-prices-are-booming-again-but-the-bust-thats-bound-to-follow-will-cost-us-dear-8793316.html

Ill save that post for some 10pm reading. zzzzzzzzzzzzzz

chewmylegoff

David Blanchflower probably needs to learn that past performance is not an indicator of future performance. Just because prices have historically sat at an earnings multiple of 3.65 (which comes from an extremely spurious trend line anyway) or whatever does not mean they have to revert to that level in the long term, nor does it mean that 3.65x earnings is the "right" level. The only way that houses will revert to the historic average is if the conditions within the housing market and within the wider economy also return to their historic average. Why would they do that?

ILW

OffGridLiving wrote: »

How many times does it have to be said that London is not the UK?

In the majority of the UK you have to have a recovery before you have a boom.

London does virtualy pay the rest of the UKs bills though.

Loughton_Monkey

Halifax HPI UK Q4 1994 = 202.7 [Average Price £62,636]
Halifax HPI UK Q4 2004 = 523.5 [Average Price £161,742]

523.5/202.7^(1/10)= 9.95% average annual rise!

Both the Indie and Danny Blanchflower speak with heavily forked tongue. If they can't distinguish between 10% and 16% then they don't belong in financial journalism.

OK, he was pretty good with his feet at Tottenham, and should have stayed in football. Footballers' brains are in their feet, and this boy has put his own foot in it good and proper. Anyway, he must be about 87 by now. Probably a bit addled, and should go and have a nice lie down.

Typical left-wing economic journalism. Come to a conclusion of what you want to happen and then cobble together some false statistics, lies, and scaremongering to 'prove' to the uneducated that it will happen.

gazzabboi wrote: »

Ill save that post for some 10pm reading. zzzzzzzzzzzzzz

I shouldn't bother.... go and have a large gin & tonic....

wotsthat

It is hard to find a single economist who thinks it is a sensible idea – it is cynically designed to buy votes. Based on the Government’s historic defeat over Syria, it is likely to need every vote it can get in 2015. The inevitable fall in house prices that is coming will cost the country dear, as Mr Osborne has provided a £100bn backstop. Here we go again.

Who'd have though conflict in the middle-east would be bullish for UK house prices?

Graham_Devon

Loughton_Monkey wrote: »

Halifax HPI UK Q4 1994 = 202.7 [Average Price £62,636]
Halifax HPI UK Q4 2004 = 523.5 [Average Price £161,742]

523.5/202.7^(1/10)= 9.95% average annual rise!

Both the Indie and Danny Blanchflower speak with heavily forked tongue. If they can't distinguish between 10% and 16% then they don't belong in financial journalism.

You got your sums wrong.

Q4 1994 - £62,066
Q4 2004 - £161,288

Percentage change per year = 15.99%

An average annual growth rate of 9.95% would put prices in 2004 at around £126,000